The Secure Act: What It Means for Your Retirement Account

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act was signed into law. The bill includes provisions intended to provide relief and assistance caused by the spread of the COVID-19 virus. Included in the bill were provisions directly relating to retirement accounts.

Summary of retirement account provisions:

Waiver of RMD for 2020

Coronavirus-related Distributions- Waivers and Extended Deadlines

Waiver of 10% penalty for Coronavirus related distributions

Increase in loan amounts

Three Year Income Spread

Waiver of RMD for 2020

Folks who were otherwise supposed to take a required minimum distribution for 2020 are no longer required to do so.

The formula for calculating an RMD for 2020 includes the fair market value of the account as of December 31, 2019. Due to the recent market downturn, the RMD would represent a disproportionate percentage of the current market value of the account.

To address this problem, the CARES Act waives RMDs for 2020. As a result of this waiver, there are no 2020 RMD for the following accounts:

Accounts under defined contribution plans, such as 401(k)s and profit-sharing plan accounts

403(a) qualified annuity plans

403(b)s plans

Traditional IRA

As a reminder, ROTH IRAs do not have RMDs.

Coronavirus-related Distributions- Waivers and Extended Deadlines

The CARES Act relaxes the income tax rules that apply to coronavirus-related distributions. A coronavirus-related distribution is defined as one that is made on or after January 1, 2020, and before December 31, 2020, to an individual:

who is diagnosed with the virus SARS–CoV–2 or with coronavirus disease 2019 (COVID–19) by a test approved by the Centers for Disease Control and Prevention,

whose spouse or dependent is diagnosed with such virus or disease by such a test, or

who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus illnesses, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the IRS.

Coronavirus-related distributions are capped at $100,000 per taxpayer.

Waiver of 10% penalty for Coronavirus related distributions

Distributions from a retirement account are subject to a 10% early distribution penalty or additional tax if they occur before the retirement account owner reaches age 59 ½ unless an exception applies. Coronavirus-related distributions have been added to the list of exceptions to the 10% early distribution penalty.

Increase in Loan Amounts

For 401(k) plans that permit loans like Rocket Dollar’s Solo 401(k), the account owner may borrow the lesser of 50% of the account balance or $50,000 whichever is less. The CARES Act increases the $50,000 limit to $100,000 for loans made after March 27, 2020, and for 180 days. To qualify, a person who would need to meet the requirements for a coronavirus-related distribution.

For participants who already have an outstanding loan on the plan, and whose vested account balance is 10,000 or less, a special calculation will need to be done to determine the loan amount for which such individuals are eligible.

Three Year Income Spread

In the case that you have to take a COVID-19 related distribution, you will be able to spread out the income taxes owed on the distribution over three years from the date you took the distribution. If you are able, you can also put the money back into the account before the three years are up, even though you usually are not able to contribute that large of an amount.